Australian Market Review and Outlook: February 2015

Macro Themes: Volatility Runs Rife 

Global Economy

The ripples of volatility witnessed during back-end of 2014 have surged to a dramatic swell at the outset of the year. This has been best reflected in the enduring collapse of global commodity prices as well as extreme movements in the FX arena.

ECB President Mario Draghi kicked off the bank’s first gathering for the year with  bang! The central banker unleashed a widely-anticipated quantitative easing program, that seemingly surpassed investor expectations in terms of size. The Euro plunged to a fresh multi-year low against its US Dollar counterpart in response to the announcement. Looking ahead, the ability of the QE program to restimulate economic growth and stave off deflation in the Eurozone is questionable, given the headwinds posed by contractionary fiscal measures.

The Swiss National Bank also caused a stir when it shocked traders by abandoning its defence of the long-held CHF peg against the Euro. The surprise decision sent shockwaves through the financial markets, with several large brokerages declaring losses in the hundreds of millions due to the move. Nearby Denmark also cut rates three times in the space of two weeks, in order to maintain the Kroner’s value against the Euro.

Domestic Economy

The Australian Dollar plunged to a fresh multi-year low against the greenback, as the USD extended gains from 2014. The Aussie may be at risk of further declines as expectations of a rate cut by the RBA build. This follows the release of local December CPI figures that revealed a slump in inflation (trimmed mean) towards the lower bound of the central bank’s 2 to 3 per cent range. Additionally, speculation has mounted that the collapse in commodity prices may have more negative consequences for the local economy than previously anticipated.

Australian Share Market

Local equities had a bumper start to the year with the ASX 200 rising by just over 3 per cent for month of January. However, continuing the segmented performance of 2014, the gains have not been broad-based. Specifically, the defensive yield-plays continue to outperform, with Telstra hitting a 13 and a half year high. Health care stocks were also among the top performers, particularly those with offshore earnings exposure, which benefited from the lower Australian Dollar. 

At the other end of the spectrum, resource and energy stocks endured further declines. Market heavyweight BHP slipped to the lowest level in more than 5 years alongside a further slide in the iron ore price. 

The local earnings season is set to get kicked off in February. Against a backdrop of subdued economic growth investors have set modest expectations. Companies that can sustain dividend policies and achieve low-cost growth will likely be rewarded.

Australian Property Market

The local housing market continues to be buoyed by record low interest rates, which have spurred on investor activity. Meanwhile, loan growth for owner-occupiers remains subdued. Looking forward, the RBA has warned that the rise to record house prices for many capital cities may be at risk of reversing, if investor appetite were to wane.